Managing Working Capital to Spur Growth – October 2014

This topic concerns financial management.

In some cases when revenue increases there is not a sustained improvement in working capital management. The unfortunate result is reduced profitability as measured by return on capital. Such an inefficient use of capital requires the attention of the CFO.

The cause of this situation is companies require more working capital to generate an additional dollar of sales. That is, companies are less effective at converting inventory and accounts receivable into cash that can be used to spur growth. This unacceptable situation can be resolved by taking several steps:

1. Careful management of inventory levels through hands-on management of the supply chain. This can be accomplished by developing metrics that measure what is important to your company’s business lines. For instance, measure the volume of demand and profitability of various products. Then determine if it makes sense to continue to make the products in the same volume.

2. Extend accounts payable terms in exchange for the promise to pay on time as well as maintain or raise order volume. At the same time, utilize ACH payments and p-cards. Once established, strictly adhere to the terms agreed upon.

3. Accelerate accounts receivable collections by more active credit and collection efforts aimed at traditionally laggard accounts.

All of these efforts require the CFO develop and apply a cohesive effort to make them a reality. It is important that all those involved in this effort be thus rewarded. To do this requires the CFO to devise metrics that enable the company to measure the effects of these efforts and link a portion of everyone’s compensation to achievements of those metrics.

Improving working capital management during a time of solid sales growth, requires less capital to generate the additional sales, thereby improving profitability for the firm and its shareholders while rewarding those who made it happen.

Capitol CFO Solutions serves clients in Washington, D.C., Maryland, and Virginia. Please contact us for a free consultation.